Tag Archives: pro

High Yield In Focus: 9.53% From Suburban Propane Partners

Summary Suburban Propane Partners is not impacted by commodity downturns. The company has a capital-light business model. Growth opportunity is limited, but SPH can increase distributions via accretive acquisitions. Suburban Propane Partners (NYSE: SPH ) is an MLP that markets and distributes energy products. In addition to propane, the company also sells fuel oil and electricity. As a reseller of energy, the company was not dramatically impacted by the recent commodity downturn. Given that SPH hasn’t missed a single dividend over the past 10 years and has grown the distribution from $0.6125 per quarter in 2005 to $0.8875 per quarter today (45% increase), would now be a good time to buy the stock at a yield of 9.53%? Largely A Propane Business Propane accounts for the highest percentage of the total revenue, coming in at 83%. The propane segment also constituted more than 100% of the total operating income in 2014. How is that possible you ask? That’s because other segments are actually losing money on a GAAP basis. For example, the “All Other” segment has been losing money for three years in a row ($17 million in 2012, $26 million in 2013 and 2014). Evidently, although the company offers a variety of products, the core business still revolves around the sale of propane. Propane use is heavily dependent on the weather. To illustrate, the company sells approximately two-thirds of its retail volume from October to March (the cold months). Of course, this means that warmer weather will directly affect the bottom line. This will introduce some uncertainty to our cash flow in the short term, though this fluctuation should even out in the long run when colder weather returns. Financials The company generated $226 million of operating cash flow ($248 million after adjusting for working capital changes) in 2014. This amount was very close to the company’s distribution of $211 million. This means that the company is pretty much paying out everything that it earns, which is great for income investors. Unlike other popular MLPs (e.g., midstream), the company’s operations are not capital intensive. There are no pipelines to be laid or other growth projects that would require large capital spending. This has allowed the company to keep net maintenance capital expenditure at around $20 million per year. So we have a capital-light company that is generating high cash flows. But growth opportunity is rather limited. Let’s look at the chart below. Although revenue has increased significantly, the growth was not attained organically. Jumps in revenue in 2004 and 2013 can be attributed to the acquisition of Agway Energy and Inergy Propane, respectively. But this should not faze you, as the company has increased normalized operating cash flow per share from $2.41 in 2004 to $4.08 in 2014. Ultimately, dividends depend on cash flow generation, and the fact that these acquisitions were accretive means that the company could afford to increase dividends. So the question is, can the company continue to make accretive acquisitions? The answer is quite complicated, as it depends on a multitude of factors, including but not limited to the skill of the management and the existence of opportunities. We can somewhat gauge the former by looking at how major acquisitions have turned out. Judging by the outcomes described in the previous paragraph, the management seems to have made the right decisions. As for the existence of opportunities, this is completely out of management’s control and depends on market sentiment. When assets are valued cheaply, it creates opportunity. Unfortunately, we don’t know when and how it will happen, so this is a big question mark. One thing we do know is that the management is looking for acquisition opportunities, as they’ve stated that they “seek to extend our presence or diversify our product offerings through selective acquisitions.” The fact that the management looks for “businesses with a relatively steady cash flow” should also provide you with some assurance. Another question you may have is that if the company is paying out everything in cash, where is it getting money to complete acquisitions? Well, management completes deals by raising additional debt and equity. For example, for the recent Inergy acquisition worth $1.8 billion, the company raised $1 billion in debt and paid the rest with cash and stock. The debt may seem high, but the company earns more than enough to cover the interest expense. Looking at the chart below, we can see that the interest coverage ratio has generally been above 1.5x. If we add the non-cash expenses back, the cash coverage ratio would be even higher. This means that the company should be able to maintain the current capital structure. Takeaway The company runs a stable business and sells a product that will always be in demand. Its operation is not capital-intensive, allowing it to pay out much of its operating cash flow. While you shouldn’t expect an increase in dividends without an acquisition, the company is capable of maintaining the current distribution. Keep an eye on acquisition announcements; if history is a good indicator, you should expect dividend increases to follow. However, even if we look at the stock right now, it is hard to argue with its current yield. If you are satisfied with a near-10% yield, then now may be a good time to consider Suburban Propane Partners for your portfolio. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Buy On Euphoria, Sell On Panic – A Contrarian Strategy That Works For China

A newly-published risk model shows that buying on euphoria and selling on panic has been a successful strategy for Chinese equity markets. Rational investment Chinese style is to watch for shifts in government policy rather than changes in spreadsheet data. Liquidity is seen as the proxy signal for when Beijing turns positive/negative on equities and roll out measures to support or suppress higher prices. It shouldn’t work – but it does. Winners in China’s A-share markets buy when market sentiment is high and sell when market sentiment is low. Or, as I recommended to investors in a previous post, toss out the spreadsheet and other textbook fundamentals and go with herd psychology. It works. And now there is a study to prove it. Credit Suisse has just published a risk model for investing in Chinese stocks. And it has found that the signals for buying and selling in Chinese markets are “the opposite” of what’s expected everywhere else in the world. Chinese investors buy on euphoria and sell on panic – and the strategy has been successful on the whole, according to the Swiss banking group which has now included China in its proprietary Global Risk Appetite Index. The index, which has been around for some 20 years, measures the performance of stock markets against government bond markets based on rolling six and 12 month returns and correlates risk appetite with investment signals. The global version shows that risk is cyclical and confirms accepted market wisdom that the best time to buy is when risk appetite is low (such as during a panic) and to sell when risk appetite is high (as when the market is in euphoria). The cycles in risk appetite in most markets correlate closely with what is happening in the global economy. Extremes in risk appetite thus provide reliable countercyclical trading signals. So if you buy when the market panics and wait for the eventual rebound, you make a tidy profit. China, as always, is different. Prices don’t follow fundamentals in the way they do elsewhere in the world but are more closely linked to investor psychology, according to the report. Among the findings , as reported by the media, are: “… in China, buying the market when risk appetite was high and selling when risk appetite was low has been a successful strategy in general. This is the opposite of how our Global Risk Appetite Index has behaved.” The report gave two reasons for why the China market is different. One, the free float is much smaller than in other markets because state firms account for 45% of market valuations. Small moves in a stock can thus have a huge impact on the price. Second, the level of government intervention is high. Further distorting traditional signals is the extreme swings in risk appetite that characterize the Chinese market. Prices tend to overshoot and go off the charts before reverting to the norm – challenging standard concepts of “cheap” valuations. Nor are conventional performance metrics of much help. The fortunes of individual companies can – and have been – scuppured by government campaigns, such as Beijing’s anti-corruption drive. The Chinese corporate world is unusual in that the sins of executives are often visited on the companies they run. When a top executive falls, he typically brings down all around him, sometimes even the company itself, as I explained in a previous article, ” The Midnight Knock. ” The strategy that has produced results in China’s contrarian equity markets is to follow the herd. This means jumping in when the market is high (as the chances are that you can sell even higher) and dumping stocks when the market is low (as it is likely to go even lower). But this does not mean the Chinese stock market “behaves weirdly”. Investors in China simply follow a different set of rules, as I have argued in many previous posts. They track fundamentals but of a different sort. Chinese fundamentals have little to do with western textbook metrics and everything to do with government policy – unlike in Western markets where the term “fundamentals” has been hijacked by the financial industry to mean only spreadsheet data. In China, the very visible hand of government is always hovering – skewing market direction and distorting what would be classic signals in the free and open markets of advanced economies. The valuation that matters in China is the price-to-fear/greed ratio. And the signal for the switch from greed to fear and back is liquidity. Driving stock prices in China is liquidity . Not the economy. Not corporate earnings. Not abstract theories of reform or quality growth that is supposedly superior and sustainable for years to come. Liquidity is seen by Chinese investors as the proxy signal for when the government turns positive/negative on equity markets and will roll out measures to support/suppress higher prices. The biggest losses since the rally took off in earnest last September have all been triggered by market fears that the regulator was about to put an end to the party by pulling liquidity. Investors started turning skittish in January when the regulator tightened rules for entrusted loans which had been providing funds for stock purchases. The move was perceived as signaling a coming government squeeze on liquidity to cool the bull run in equities. The market has since been swinging between greed and fear amid conflicting interpretations of Beijing’s policy moves. Every investor in Shanghai and the rest of the country has been watching every other investor to see who might be pulling out and who might be doubling down on their bets. Confidence is a fragile commodity in a market where policy U-turns can happen overnight and with little warning. Hence, the inherent volatility in A-share prices. China’s domestic investors did not put money into the market because the textbook fundamentals looked right. On the contrary, price-to-earnings ratios were soaring, the yield advantage that stocks offer over bonds rapidly shrinking, and economic growth was at a 24-year low with corporates sagging under heavy debt burdens. What domestic punters had been betting on for the past year was a liquidity story backed by policy – the only fundamental that matters in China. The A-share markets are likely to remain range-bound in the coming weeks as investors digest the implications of Beijing’s stock rescue and decide if there is time for one more roll of the dice. This is rational investment, Chinese style. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.